After the SEC posted its proposing release for its semiannual reporting proposal last week, it posted this 3-minute video about the proposal. And here’s an excerpt from this Cooley Alert penned by Brad Goldberg, Beth Sasfai, Luci Altman, Vicky Peluso, Julia Boesch, Liz Dunshee, Sarah Seller and Reid Hooper:
Open questions
The SEC has solicited comments on a range of issues that may shape the final rule. Key areas of uncertainty include:
- Eligibility for electing semiannual reporting (i.e., a mandatory or optional requirement)
- Filing deadline for Form 10-S
- Permissibility of midyear changes to reporting frequency and method of such changes
- Treatment of earnings releases for semiannual filers (i.e., whether earnings releases should be “filed” rather than “furnished”)
- Auditing and accounting implications, including with respect to the comfort letter process
- Implications to insider trading policies, trading windows and Rule 10b5-1 plans
- Comparability of financial information among quarterly and semiannual reporters
- Compliance date, including any applicable transition period
Observations and commentary
When evaluating a shift to semiannual reporting, companies should consider a number of factors, including:
- Impact on quarterly earnings disclosure. Depending on their investor profile, companies may feel compelled to continue to issue earnings releases and hold quarterly earnings calls. Additionally, because semiannual filers will be reporting financial and other material information on a less frequent basis, there may be an increase in Forms 8-K filed by semiannual filers.
Companies will also need to consider the impact on their guidance practices – shifting from quarterly guidance to semiannual, annual or no guidance – when evaluating a move to semiannual reporting. - Implications for active registration statements. Companies that have active registration statements are required to keep them current to ensure investors have all of their material information. For many companies, this is achieved through incorporation by reference of their Exchange Act reports into their registration statements.
A company moving to semiannual reporting would need to be mindful of the fact that extant registration statements would be regularly updated only two times per year rather than four times per year. This consideration would be relevant not only for companies with shelf and resale registration statements but also for companies with employee equity plans registered on Form S-8. - Capital raising needs. Given the current practices regarding auditor comfort letters and negative assurance for securities offerings, depending on the timing of an offering, an underwriter may request auditor review of more recent interim financial statements than those included in the last semiannual or annual report in order to obtain traditional negative assurance comfort.
Companies with near-term capital raising needs may need to continue to report quarterly, depending on how the underwriting process adapts to a semiannual reporting structure. - 10b5-1 plan, insider trading policy and Regulation FD considerations. Semiannual reporting could affect the cooling-off period for Rule 10b5-1 trading plans adopted by directors and Section 16 officers. Under Rule 10b5-1, trading cannot begin until after a cooling-off period expiring the later of 90 days after adoption or modification of a plan or two business days following disclosure of a company’s financial results for the relevant fiscal period in a Form 10-K or 10-Q, subject to a maximum cooling-off period of 120 days.
For companies that elect semiannual reporting, trading plans adopted during the first or third quarter would more likely be subject to the full 120-day cooling-off period before trading may begin under the plan.
Additionally, companies adopting a semiannual reporting framework may need to impose longer trading blackout periods under their insider trading policies. A semiannual reporting framework could result in longer gaps between the disclosure of financial and other material information. Companies may prefer to continue a quarterly reporting cadence, or to continue issuing quarterly earnings releases, to allow for more frequent open trading windows.
Relatedly, a semiannual framework may result in the need for more rigorous policies and protocols around Regulation FD. If companies are in possession of material nonpublic information for longer periods of time, the risk of inadvertent disclosure of such information increases, and a company’s ability to have discussions with analysts and investors could be impacted. - Competitive (dis)advantages. A semiannual reporting framework could create information asymmetries between companies that report semiannually and those that continue to report quarterly. Companies that elect to continue to report quarterly would disclose financial results, legal developments and other information more frequently, which may provide semiannual reporters with additional visibility into competitors’ performance and strategies they can use to inform their own decision-making.
At the same time, semiannual reporting companies may be at a disadvantage in the public markets. Investors may rely on more frequent disclosures from quarterly reporting peers as indicators of industry trends, which could cause the stock prices of semiannual reporters to move in response to competitors’ results, even when those companies have not provided updated information about their own performance.
Authored by
Broc Romanek